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Stripe’s funding: Go big or go home!

I was just reading about Stripe‘s $ 80M investment today (full disclosure: Stripe is a partner of FreshBooks where I work. And we love them…). They raised $ 80M at a $ 1.75B pre-money valuation. So, what am I thinking about this?

Payments is super hot right now. Braintree was recently bought for $ 800M. The business of moving money around has never been hotter.

Stripe has no choice now but to go for a unicorn size outcome. More on this point:

If you run the math on this deal, the investors bought just over 4% of the company. Yep! 4% for $ 80M. At this cheque size, investors are looking for 3x returns as a baseline. So, for the investment to work the company has to exit for over $ 5.5B.

Now the probability of ever being worth $1B in the first place is very low. To now generate a minimum return for their investors, Stripe is going to have to grow significantly.

I have no doubt that they’re on path, but being on that path means you have only one choice: go big or go home. When you’re on that path the potential for misalignment between founders and investors runs high. If someone were to turn around and offer $3B to buy Stripe it would completely change the lives of the founders. But the investors would hate it (and may even be able to block it).

The worst potential for misalignment comes when you grant investors multiple liquidation preferences. Say for example as an investor I get a 2x pref. That means I get 2x my money out before anyone else gets a penny. I might be indifferent to the price I pay to invest in that company because I know I’m guaranteed a minimum return. That creates all sorts of misalignment between the company and its investors.

Anyway, I’m not saying any of that’s going on at Stripe. Just thought that this deal was a great chance to highlight some of the issue with big ticket deals like this.